This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

The IRS has issued
Rev. Proc. 2008-65, which provides guidance on new Sec. 168(k)(4),
added by Section 3081 of the Housing and Economic Recovery Act of
2008, P.L. 110-289. Sec. 168(k)(4) allows corporations to elect out
of claiming the 50% additional first-year depreciation for new
property acquired after March 31, 2008, and placed in service before
January 1, 2009. Under Sec. 168(k)(4), corporations may elect to
increase their business credit limitation under Sec. 38(c) (but only
for certain research credits determined under Sec. 41(a)) or their
alternative minimum tax (AMT) credit limitation under Sec. 53(c).
Rev. Proc. 2008-65 is effective October 10, 2008.

That is acquired
after March 31, 2008, and before January 1, 2009, provided no
written binding contract was in effect before March 31, 2008
(special rules apply to passenger aircraft and to property with a
long production period); and

That is
manufactured, constructed, or produced for the taxpayer’s own use
and is manufactured, constructed, or produced after March 31,
2008, and before January 1, 2009.

If new property is
placed in service after March 31, 2008, and is the subject of a
sale-leaseback transaction within three months of the
placed-in-service date, the taxpayer-lessor is treated as the
original owner and the original placed-in-service date by the
taxpayer-lessor is not earlier than the date on which the property
is used by the lessee under the leaseback.

SEC. 168(k)(4) ELECTION

Rev. Proc. 2008-65
provides ordering rules for making the elections out of bonus
depreciation under Sec. 168(k)—the election under Sec.
168(k)(2)(D)(iii) and the Sec. 168(k)(4) election. Under the
procedure, a corporate taxpayer applies the election out of bonus
depreciation under Sec. 168(k)(2)(D)(iii) first. The taxpayer makes
that election on an asset-class basis. If an election is made under
Sec. 168(k)(2)(D)(iii) for a certain class of property, that class
of property is not qualified property under Sec. 168(k)(2) or
eligible qualified property under Sec. 168(k)(4).

The corporate
taxpayer makes the Sec. 168(k)(4) election for its first tax year
ending after March 31, 2008. Once the election is made, it applies
to all eligible qualified property placed in service by the taxpayer
in the taxpayer’s first tax year ending after March 31, 2008, and
any subsequent tax year and may be revoked only with the Service’s
consent. If the taxpayer wants to apply the election to subsequent
tax years, it must make the election for its first tax year ending
after March 31, 2008, even if the taxpayer does not place in service
eligible qualified property in its first tax year. If a Sec.
168(k)(4) election is made, the straight-line depreciation method
should be used for all eligible qualified property.

Importantly, under
the revenue procedure all corporations that are treated as a single
employer under Sec. 52(a) are treated as one taxpayer for purposes
of Sec. 168(k)(4) and the election thereunder. Thus, for example, if
the common parent of a consolidated group makes the election under
Sec. 168(k)(4) for one member of the affiliated group, then all
members of the affiliated group are treated as one taxpayer for
purposes of Sec. 168(k)(4) and as having made the election.

The IRS intends to
issue separate guidance on the time and manner of making the Sec.
168(k)(4) election.

BONUS DEPRECIATION

The bonus
depreciation amount is defined in Sec. 168(k)(4)(C)(i) as an amount
for any tax year equal to 20% of the excess (if any) of:

1.The aggregate
amount of depreciation allowable under Sec. 168(k)(1) for all
eligible qualified property placed in service by the taxpayer during
the tax year, over

2.The aggregate
amount of depreciation that would be allowable under Sec. 168
without regard to subsection (k)(1) for all eligible qualified
property placed in service by the taxpayer during the tax year.

In computing the
bonus depreciation amount, Rev. Proc. 2008-65 provides that the
applicable convention rules under Sec. 168(d) apply in computing the
aggregate amount of depreciation; however, this computation is made
without regard to any elections to use the 150% declining balance
method, the straight-line method, or the alternative depreciation
system (ADS), or the requirement to depreciate eligible qualified
property using the straight-line method. In addition, for a
corporation that is a partner in a partnership, the corporation’s
computation of aggregate depreciation does not include depreciation
property placed in service by the partnership. Special rules apply
for passenger aircraft and long production period property.

Rev. Proc. 2008-65
provides that the bonus depreciation amount must not exceed the
maximum increase amount reduced by the sum of the bonus depreciation
amounts determined under Sec. 168(k)(4)(C) for all preceding tax
years. The maximum increase amount is the lesser of: (1) $30 million
or (2) 6% of the sum of the business credit increase amount and the
AMT credit increase amount. The business credit increase amount is
the portion of the credit allowable under Sec. 38 for the first tax
year ending after March 31, 2008, that is allocable to business
credit carryforwards to such tax year that are from tax years
beginning before January 1, 2006, and properly allocable to the
research credit determined under Sec. 41(a). A business credit
carryforward allocable to the research credit that was from a tax
year beginning before January 1, 2006, but has expired before the
first tax year ending after March 31, 2008, is not taken into
account in calculating the business credit increase amount.

Rev. Proc. 2008-65
defines the AMT credit increase amount as the portion of the minimum
tax credit under Sec. 53(b) for the first tax year ending after
March 31, 2008, determined by taking into account only the adjusted
minimum tax for tax years beginning before January 1, 2006. Minimum
tax credits are treated as allowed on a first-in, first-out basis.

ALLOCATION OF BONUS DEPRECIATION AMOUNTSRev. Proc. 2008-65 allows a taxpayer to specify the portion of
the bonus depreciation amount for the tax year that is to be
allocated to the business credit limitation under Sec. 38(c) and the
AMT credit limitation under Sec. 53(c). However, the bonus
depreciation amount allocated to the business credit limitation
under Sec. 38(c) must not exceed the excess of the business credit
increase amount over the bonus depreciation amount allocated by the
taxpayer to the limitation for all preceding tax years. The bonus
depreciation amount allocated to the AMT credit limitation under
Sec. 53(c) must not exceed the excess of the AMT tax credit increase
amount over the bonus depreciation amount allocated by the taxpayer
to the limitation for all preceding tax years.

Rev. Proc. 2008-65
sets forth an example of a corporation with $10 million in business
credit carryforward and $590 million in AMT credit carryforward. The
sum of these carryforwards ($600 million) multiplied by 6% equals
$36 million. Thus, the maximum increase amount is $30 million. Of
this $30 million, up to $10 million (the full amount of the business
credit carryforward) may be allocated to the business credit
limitation.

IMPLICATIONS

Taxpayers will
need to carefully evaluate the bonus depreciation election ordering
rules to maximize the depreciation deduction and the refundable
credit. By permitting taxpayers to first make the election out of
bonus deprecation under Sec. 168(k)(2)(D)(iii), taxpayers may still
depreciate such elected classes of property using MACRS. For all
other property for which a taxpayer (which for purposes of Sec.
168(k)(4) includes all affiliated group members filing a
consolidated return) elects not to claim bonus depreciation, all
eligible qualified property placed in service by the taxpayer (which
includes all members of a consolidated group) must be depreciated
using the straight-line method, regardless of whether such property
results in additional refundable credits.

Rev. Proc. 2008-65
states that the IRS intends to publish separate guidance on the time
and manner for making the Sec. 168(k)(4) election and for allocating
the credit limitation increases allowed by the election.

An October 6,
2008, posting on the IRS website directs taxpayers with fiscal years
ending after March 31, 2008, to not make the Sec. 168(k)(4) election
and claim the refundable credit on their original 2007 return.
Instead, the Service directs these taxpayers to make the election
and claim the credit on a subsequently filed amended return.
Taxpayers intending to make the election and claim the refundable
credit on an amended 2007 return may claim the bonus depreciation
deduction on their original 2007 return for all classes of property
for which they did not make the Sec. 168(k)(2)(D)(iii) election out
of bonus depreciation.

It is important to
note that, as stated above, Rev. Proc. 2008-65 requires taxpayers to
make the election on their first tax year ending after March 31,
2008, even if they do not place any eligible qualified property in
service in its first year. However, because fiscal-year taxpayers
must make the Sec. 168(k)(4) election on amended 2007 tax returns,
this will afford fiscal-year taxpayers additional time to make the
decision based on their fiscal 2008 activities.